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Economy Is Driven by Private Sector, Not Obama or Congress Says Paulsen


After a clear and decisive re-election of President Obama, stocks are selling off over 2% in early trading as concerns out of Europe are helping to weigh on investor sentiment. While the election is over, uncertainty about the future of the U.S. and global economies remains at the forefront. For investors like Jim Paulsen, chief investment strategist at Wells Capital Management, simply re-electing a president is not what will restore economic growth moving forward.

Related: Obama Re-Elected, Now About That Fiscal Cliff...

"The best things for investment and the economy are when there's a split power base in Washington, that no one side has all three pillars of power," says Paulsen. Looking back historically, he believes the worst things happen when one party has too much power, pointing to Obama's first two years as President. While the Democrats didn't have filibuster-proof control of Congress, they did have majority rank in the House and Senate.

"In the last four years, the first two under Obama were a lot worse than the second two — in the second two there was more gridlock and split power and the economy came back and the markets went to new highs," he says. "I don't think that's just a coincidence. I really think the private sector is the driver going forward and the government's along for the ride."

In 2009 and 2010, the Obama Administration passed signature legislation including an $800 billion economic stimulus bill, the Affordable Care Act, and Dodd Frank financial legislation. Government spending rose dramatically, the Bush tax cuts were extended, and we inched further along the path towards the fiscal cliff. "You can focus on the fiscal time clock to the cliff and all that this year, or you can focus on what's happening out in the private sector economy and how much is gearing in this recovery," says Paulsen, ticking off improvements in the labor market, rising consumer confidence and home prices, and the debt service burden falling.

Related: Economic Shock From Fiscal Cliff Will Last Over a Decade: NAM

"The most important thing going on is, since the summer, the U.S. economy has been picking up and broadening, we're now seeing evidence that the emerging world economies and China might be starting to bottom out," he says. "That is going to wag the global dog here in the next year, not what Congress does or doesn't do."

So, whether your candidates won in the 2012 election or not, a cyclical economic recovery could be the real victory we'll all share in the year ahead.

As for investing now, Paulsen sees opportunity ahead. In his latest note to clients he ends on this positive note:

"The contemporary recovery may be entering a multi-year period of "investment normalcy" whereby economic confidence improves producing a calmer financial market sentiment. In the past, this has led to a much more "risk-on" friendly investment climate where stock returns improve significantly, financial market volatility decays and inter-class diversification returns. Perhaps it is a good time for investors to tweak portfolios accordingly as we head into 2013."

With the heated presidential election now behind us, do you believe the economy and markets are on the right path forward? Let us know in the comment section below or visit us on Facebook!